Freedom with fuel stops

Oil sector reform without freeing up of diesel & LPG is a killer.

Cheering the announcement of freeing up of petrol prices and an intention to do so with diesel, is something like the excitement at the sight of `80% OFF’ sign at Big Bazaar with an invisible asterisk. *Conditions apply: Only on toilet paper.

Full reading of the press release announcing the so called “oil sector reforms” welcomed by the experts, will tell you there is little reform in it.

“It has also been decided that in case of a high rise and volatility in international oil prices, Government will suitably intervene in the pricing of petrol and diesel,” the petroleum ministry said on June 25. The catch here is: “high rise and volatility”, and “suitably”.

The only event is the apparent freeing up of petrol prices which is just 10% of oil companies’ sales. With diesel, it is just the intention and with cooking gas and kerosene, it is a clear no. So, what is the reform and how is it going to change the oil dynamics in the country.

Hardly anything, at least for now. The losses for oil marketing companies even after the price changes will be Rs 53,000 crore. It will be magnified if crude prices soar either due to demand in developing nations, or because of cheap money driven overall inflation.

The track record of this administration shows that it takes one step forward, two steps back. The way it handled inflation of the past year with prayer to rain gods and intervening in markets, throw light on what is in store, especially after the successful general strike on Monday.

Prime minister Manmohan Singh’s government banned sugar exports and trading in futures in 2009 when the prices started rising after many years of depression.

It restricted stocking up too in the name of preventing hoarding. The ban on futures trading in rice, and two other pulses remain. Trade in corn, edible oils, non-basmati rice were suspended without any warning.

The most sorrowful agrarian crisis in recent years has been the cotton farmers’ suicides. When the death rates were falling with cotton trade becoming profitable, the government stepped in, not to enhance, but to curb. On demands from textile mills, it moved the commodity to ‘restricted list’ from a ‘free list’, crippling farmers.
    
Arbitrary decisions have been the hallmark. It would be so for any administration, be it Congress, or the Bharatiya Janata Party, if the oil price debate is any indication.
    
The talk of dismantling the so called Administered Pricing Mechanism began in 1995 with the R group headed by Vijay Kelkar. Four committees and 15 years later, you have the government’s hand all over. The R group was followed by the Rangarajan Committee in 2005 and Chaturvedi’s in 2008.
    
“A prescriptive, formula-based approach involving direct government intervention does not result in a competitive price discovery process,” says the Kirit Parikh panel, the latest. That is what the government proposes to do with petrol. Will prices differ at pumps run by different companies? No.
    
So, what explains the 31% jump in Hindustan Petroleum and smaller gains in Indian Oil Corporation, and Bharat Petroleum since the announcement? Euphoria.
    
These companies have been milked by politicians and bureaucrats for decades without much investments in upgradation and capacity expansion. So, the de-regulation of diesel prices, whenever it comes, would harm these, rather than benefit.
    
What they lost is reflected in Indian Oil’s profit fall to Rs 2,950 crore in 2009, from Rs, 4,891 crore in ‘05. HPCL’s fell to Rs 575 crore, from Rs 1,277 crore, while Exxon Mobil’s jumped to $45 billion, from $25 billion.
    
State-run companies’ losses between 2004 and 2009 was Rs 3 lakh crore, of which only half was made good by the government. That is, arithmetically, an opportunity loss of setting up 5.5 times the refining capacity of Reliance Petroleum which built a 27 million tonnes a year unit in Jamnagar for Rs 27,000 crore.
    
Oil companies, probably, are now in a position where Mahanagar Telephone Nigam Ltd, Bharat Sanchar Nigam, and the privatised Videsh Sanchar Nigam , now Tata Communications, were in the mid 1990s.
    
State-run telecom companies were exposed to market competition from Bharti Airtel and Reliance Communications, but remained under the dirty iron hands of politicians and bureaucracy.
    
BSNL, which would have been the biggest telephone company, is into losses. MTNL shares are down 78% since June 1997, at Rs 65 from Rs 303. Tata Communications, despite in private hands, is down 64% in the last decade. While, Bharti is at Rs 277, compared with the split adjusted Rs 22.5 initial offer.
    
If investors have to benefit, cooking gas and kerosene which consumed Rs 1.6 lakh crore of subsidy in six years, have to be freed. They constituted more than half the losses. But nothing is on the horizon.

Petroleum minister Murli Deora gifted six-lakh free cooking gas connections in Tamil Nadu as recently as May. It may accelerate with approaching state elections.
    
“We remain wary of the political pushback to reforms as important assembly elections near, especially as inflation impact will be significant,” says JP Morgan.

Brinda Karat, a politburo member of the Communist Party of India (Marxist), may have unknowingly, contributed to equity analysis when she said, the moves may just benefit some private companies.